Securities Regulation Daily Wrap Up, FRAUD AND MANIPULATION—D. Del.: Plaintiffs’ failure to read defendant-provided documents deemed case dismissed, (Sep 28, 2026)

By Jay Fishman, J.D.

Additionally, non-specified pleadings failed to overcome the PSLRA.

The Delaware District Court dismissed the plaintiffs’ Exchange Act Section 10(b) and Rule 10b-5 fraud complaint because the alleged misrepresentations and omissions on which the complaint was based were truthfully disclosed in the defendants’ corporate documents provided to the plaintiffs if only they had read them. Additionally, the allegations were not specified and, therefore, failed to overcome the Federal Civil Procedure Rule 9(b) and Private Securities Litigation Reform Act (PSLRA) pleading standards pertaining to Rule 10b-5’s material misrepresentation/omission, scienter, reliance and loss causation elements. Lastly, while the opinion covered this first count on federal securities grounds, the court first dismissed the other nine counts as being state issues for state court review (Zaldastani v. BrainTap, Inc., No. 1:24-cv-01380-JHS (D. Del. Sept. 24, 2026)).

Husband and wife drug-free therapy business. A husband and wife founded and operated a cell phone application that provided drug-free therapies to treat mental and physical health symptoms. During the relevant period, the husband and wife held two-thirds of the Board’s seats and absolute control over all corporate actions. The plaintiffs were investors who owned over 60 percent of the shares not owned by the husband and wife.

To take a subsidiary public, the defendants hired the lead plaintiff-investor to modernize the company, raise capital from angel/venture investors, and position the company for acquisition-conversion at a more than $100 million valuation. He became chairman of the board and the largest shareholder second only to the husband and wife and later became CEO of the subsidiary.

The documents. Following the subsidiary’s conversion in April 2021, the company executed a purchase agreement granting almost all plaintiffs series A preferred stock shares (comprising the SPA agreement). The SPA, however, resulted in the husband’s and wife’s shares dipping below 50 percent. The SPA contained certain representations and warranties, along with a disclosure schedule describing in detail all facts and side agreements that could have adverse effects on the business. These warranties and representations and the disclosure schedule formed the basis of the plaintiffs’ complaint, together with a 2014 and 2016 licensing agreement. The licensing agreements governed the use of the husband’s intellectual property over his created cellphone application for which he received royalties.

The verbal agreement. Around May 2016, the husband verbally represented to the lead plaintiff that his licensing agreement with the company had “the same standard terms as other licensors.”

The 2014 licensing agreement. Among other provisions, the 2014 agreement said the lead plaintiff’s license could be terminated at the licensor’s election if the lead plaintiff’s performance of the agreement is ever in default.

The 2016 licensing agreement. The relevant point in the 2016 agreement was that the husband may only terminate the lead plaintiff’s license if the husband’s ownership dips below 50 percent.

Last events before litigation. A later event to occur before the litigation began: the lead plaintiff’s termination was being planned when he was simultaneously asked to continue to find investors. After being terminated, the lead plaintiff confronted the husband about his concealing the licensing agreement’s true terms, to which the husband replied: “I can take back [his, the lead plaintiff’s] license at any time,” that he could “bankrupt the Company and take his intellectual property and start a new company at any time,” and “that no one could do anything about it.”

The complaint. The complaint pleaded some of the following allegations:

• The first time the investors, other than the lead plaintiff, received a copy of the 2016 licensing agreement was during this litigation; specifically, the investors did not have access to this agreement when the SPA was executed in April 2021 or when they made subsequent investments;

• While the company provided investors with online access to the documents listed in the disclosure schedule, the online document rooms “did not contain any of the licensing documents;”

• When the lead plaintiff relayed to the husband the investors’ concerns about the licensing agreement they never received, the husband responded that the terms were standard and that the lead plaintiff already had a copy of it;

• Not one of the plaintiff investors would have invested in the company “if they knew the company’s rights to most of its intellectual property were tenuous and potentially revocable;” and

• “No investor, knowing the Porters” [husband and wife] “were about to go below 50% ownership would want to risk a potential termination by Mr. Porter of the majority of the company’s library of content” [comprising the intellectual property].

Here’s the thrust of the lead plaintiff’s complaint: that the above bullet point items (and other items not mentioned here) were never disclosed to the other investors but that, if disclosed during the relevant period, they, reasonable investors, would have never continued to invest in the company.

Pure omissions not actionable. The court ended up dismissing the complaint after finding the Rule 10b-5 elements were not sufficiently pled to overcome Rule 9(b) and the PSLRA. But the court interwove the misrepresentation and omission element with showing why the lead plaintiff and other investors had access to the disclosures. The court pointed out that Supreme Court determined that Rule 10b-5’s material misrepresentation/omission element applies only to half-truths, not pure omissions. Pertaining to the lead plaintiff, the court emphasized that as CEO, he had constructive knowledge of the 2016 licensing agreement’s terms because he received a copy of it. As for the other plaintiff investors, the disclosure schedule contained no half-truths to render its representations misleading. Instead, it identified the licensing agreement and stated that copies were available on reasonable request.

Scienter. The lead plaintiff argued that the difference between the terms of the 2014 agreement he received from the wife and the terms of the 2016 agreement he received from the husband contained contradictions intentionally designed to deceive him. But the court considered the contradictions inadvertent mistakes rather than intentional fraud, and that the terms about termination in both agreements did not vary significantly, and he would know that from receiving a copy of each and reading them both.

Reasonable reliance. As stated above, the court proclaimed that the investors’ reliance on the lead plaintiff’s descriptions of the licensing agreements’ terms (after speaking with the husband) was unreasonable because the plaintiff investors had the opportunity to request a copy of the licensing agreements under the disclosure schedule and then read them.

Loss causation. Here, the lead plaintiff alleged that the husband concealed the right to terminate the lead plaintiff, and that is concealment enabled him to self-deal, avoid putting in financial controls, engage in nepotism (his wife) and poorly manage the company, ultimately decreasing the company’s value and harming the other plaintiffs’ investments. The court, however, found no direct causal link between the husband’s alleged concealing of the termination provision and their financial losses. This element would have been met if the husband had in fact terminated the license under the 2016 agreement to cause a loss in value, but that event never happened.

The case is No. 1:24-cv-01380-JHS.

Judge: Slomsky, J.

Attorneys: Lisa Zwally (Ballard Spahr LLP) for Nicholas Zaldastani. David A. Dorey (Blank Rome LLP) for BrainTap, Inc.

Companies: BrainTap, Inc.

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